Steady As She Goes

What a lousy week for the stock market. In case you were lucky enough to miss it, on Friday, the Dow and the S & P 500 dropped 3%, capping off an ugly four days. The market is down about 10% overall since the highs it hit in May.

As advisors, we hate these times as much as you do. Most of our clients have been with us for a while, and have seen the good and the bad (and sometimes brutal) that the markets can dish out. Each time we’ve suffered a set back, we’ve also seen the markets recover. That doesn’t, however, mean that market drops are easy to stomach when they happen. We wanted to take a minute and give you our thoughts on the current situation, along with some perspective.

Some history: Since 1900, there have been 35 declines of 10% or more in the S & P 500. The average time for the market to recover from one of those 10% drops has been about 10 months. Often, the recovery is quite quick, but in all cases it is difficult to predict and impossible to time.

Short-term volatility is the price we pay for long-term growth. The S & P 500’s historical average return is 10%, but in the short-run, we never know what to expect. Accepting this volatility is the price we pay for those long-term returns, and we need to remember that when we hit periods like this one. The definition of investing is to take short-term risk in hope of a long – term return. Investors need to stay invested to realize those long-term results, and remember that those results come in fits and starts (and sometimes reversals), not long, steady climbs.

The portfolios we use for every one of our clients are diversified, and meant to hold a mixture of stock funds and bond funds, with enough money in low-risk investments to cover short-term cash needs. If you are taking monthly or even annual distributions from your portfolio, we have built them on the premise that we don’t want to be in a position where we would have to sell stock funds during a downturn, even a downturn that is longer than the average described above.

When markets change direction dramatically, it’s often useful to review what has changed in the economy that may impact the fortunes of the companies that make up the market. Is the change real, or merely investor’s perception? As we wrote last year during a relatively minor rough patch (What do we know now that we didn’t know then), often it’s a matter of investors viewing data as the glass being half-empty where a short while ago it was half full. The recent volatility seems to stem from concerns about China’s economy and what it would mean if their economic growth slows down. While there is no doubt that China’s growth has implications for our own economy, and market, the global economic situation is too complicated to pin a market correction on any one news item. If China’s economy is indeed slowing, then there will be some companies whose earnings are hurt, but other sectors of the economy might improve in those scenarios. Furthermore, a prolonged or severe slow-down in China might mitigate another market concern, that interest rates will begin to rise. A China slowdown may put that increase off further into the future. In the meantime, most of our own economy continues to improve, as does that of Europe. The market tends to overreact to news as it comes out, and then sort out the details over time.

While we are being diligent, and working with the portfolio managers and fund managers with whom we structure our clients’ accounts to make sure they are doing as well as possible, we don’t expect to be making any structural changes. We don’t believe in market timing and maintain that short-term market moves, like we’ve seen over the last few days, are unpredictable, and we’ve invested all along based on that premise. As we wrote last year (Please Stay Seated While the Train is Moving), the situation can change quickly, negative to positive. That being said, we will look for opportunities to harvest losses and rebalance portfolios where appropriate for particular clients. But don’t expect changes in the general amounts of stocks or bonds that we hold in your portfolios.